As Feds Stalk Anticompetitive Mergers, What Can Competitors Do?

Eight Ways to Respond When Your Rivals Merge.

Continuing to make good on President Biden's pledge to root out and challenge anticompetitive mergers, the Antitrust Division of the Justice Department and the Federal Trade Commission have asked the public to join the hunt.

On May 23, the agencies publicly asked companies for information they may have on any serial acquisitions and "roll-up strategies" being undertaken across the U.S. economy. These would be smaller "stealth acquisitions" consummated under the radar in critical industry sectors that can, although gradually, harm competition, innovation, consumers, and workers just as dramatically as large deals.

The competition law enforcers want to be proactive in finding these stealthy deals which evade detection, partially because they fall below the Hart-Scott-Rodino (HSR) reporting threshold. The agencies want to give the same attention to certain smaller deals that they dedicate to headline-grabbers, efforts the country's two chief antitrust law enforcers say have been successful.

DOJ Antitrust Division

In a May speech at the American Economic Liberties Project's Antimonopoly Summit, Assistant Attorney General Jonathan Kanter said the Antitrust Division's actions during the Biden administration have helped halt more than 20 mergers in global shipping, construction, food and agriculture, the airline industry, and a range of others involving billions of dollars in commerce.

Kanter called out the proposed mergers of two sets of shipping giants: China International Marine Containers Co., Ltd. and Maersk Container Industry, and Cargotec Corporation and Konecranes Plc. In the construction industry, he noted the abandonment of the mergers of steel pipe companies Tenaris and Benteler, wall panel companies Verzatec and Crane, and insulation companies TopBuild and SPI. In the food industry he said the Division's investigation caused Fresh Express to abandon its plans to buy Dole's packaged salad business.

Kanter noted the government's success at trial of its monopsony case challenging the proposed $2.2 billion Penguin Random House / Simon & Schuster merger, and the trial victory that put an end to the JetBlue/American Airlines Northeast Alliance, which impacted 32 million air travelers.

FTC

Despite some setbacks and criticism for, as the Wall Street Journal put it, "trying to stretch antitrust law," FTC Chair Lina Khan also feels her enforcement team has done well in halting anticompetitive deals. She said during a Bloomberg / Y Combinator conference that the rising stock prices of semiconductor makers Nvidia Corp. and Arm Ltd. was proof that challenging their proposed $40 billion merger in 2022 – which would have been the largest chip deal in history – was the right thing to do. The continued competition between the companies sparked innovation which led to new products and higher stock values, she said.

More recently, on April 22, the FTC filed an administrative complaint to block Tapestry, Inc.'s acquisition of Capri Holdings Limited, a deal valued at $8.5 billion. The proposed merger would combine three major fashion brands: Coach and Kate Spade from Tapestry, and Michael Kors from Capri. In February, the FTC sued to block grocery giant Kroger Company's $24.6 billion acquisition of Albertsons Companies, Inc.

The government is not winning across the board, of course. Early last year the FTC abandoned its suit to stop Meta Platforms Inc.'s acquisition of virtual reality exercise app developer, Within Unlimited, Inc., after a federal judge in California rejected the agency's bid for a preliminary injunction to block the deal. Last summer, also in federal court in California, the FTC lost its suit to block Microsoft's $68.7 billion acquisition of video game giant Activision Blizzard. More recently, on June 5, a federal court in North Carolina denied the FTC's efforts to block Novant Health's $320 million acquisition of two hospitals from Community Health Systems.

Still, feeling some wind in their sails, the Kanter and Khan teams will continue scrutinizing mergers and take administrative or court action to block proposed deals or even unwind past combinations, as demonstrated by the DOJ's recent suit to break up Live Nation and Ticketmaster.

Also fueling an anticipated increase in government action is what analysts believe is an M&A revival, among them PwC global deals analyst Brian Levy. "We are hearing the starting bell sounding for an upswing in M&A activity, signaling an end to one of the worst bear markets for M&A in a decade," he wrote in January. "Indeed, a flurry of deals in the past few months suggests that this rise in dealmaking may already have started in some sectors."

Eight Ways to Respond to Mergers

All of this raises the question: What should your company do when your competitors or suppliers join forces, suddenly finding yourself competing with much bigger or potentially market dominant players?

Here are some options:

1. Focus on reality. Before you do anything, assess the genuine impact a merger will have on your business and your industry. Will your competitor have a larger catalog and/or better distribution? Will they have access to cheaper goods and services via their supply chain? Will it affect your business directly? Will it challenge your core business or a peripheral operation? Will the combination somehow disrupt your industry? What are your own strengths and weaknesses? Is it time for you to team up with other players? An assessment of these and other questions will help you craft an appropriate response and eliminate false assumptions.
2. Focus on your core. "If the merger attack isn't in your main market, consider retreating to your core market rather than diverting valuable resources to protect a peripheral one," wrote business professors Thomas Keil of Finland and Tomi Laamanen of Switzerland in their 2011 Harvard Business Review article, titled "When Rivals Merge, Think Before You Follow Suit."
3. Focus on innovation. While some companies will respond with acquisitions of their own, a better path may be right in front of you. Sometimes you can regain a greater advantage by turning to innovation and organic growth, Kiel and Laamanen suggested. How can you best use your existing assets and capabilities to blunt the effects of a merger?
4. Focus on your strengths. Identify your company's unique strengths and areas where you can differentiate yourself from the merged competitor. "In fact," wrote Keil and Laamanen, "a rival's merger can provide an opportunity for other players to strengthen their positions at the expense of the attacker (and of other rivals who react by making acquisitions themselves). The first step is to determine the merger's potential for industry disruption. How mature is the market, and how important is it to your firm? Is the attacker exploring a new market or shoring up its position in an established one? If the former, does it have a history of successfully entering new markets through acquisitions? Finally, can the attacker leverage complementary resources or market positions?" Again, answering these questions will better inform your response strategy.
5. Focus – hyper focus – on existing customers. Now is the time to shore up your existing clients, customers, and your suppliers, too. Have you met with them recently to evaluate their satisfaction and to better understand their challenges? As everyone knows, it is much more expensive to acquire new customers than retain existing ones. Maybe you already give your customers and suppliers the white-glove treatment. But, if there was a time to go the extra mile for them, this is it.
6. Craft a clear and compelling message. Clarify for your market the unique value of your company's products and services. How are you different? Why does it matter? What critical need do you address better than anyone else? Once you have identified these things, develop a company-wide go-to-market plan through marketing, sales, and public relations to drive your message home.
7. Consider your own acquisitions or alliances. "Many successful companies ... have used small acquisitions to gradually build a counter position," wrote Keil and Laamanen. (Some do this so well they create market problems themselves, a concern of the DOJ and FTC, as we discuss above.) Alternatively, however, a company can sharpen its competitive edge through alliances and partnerships, which often can be executed quickly and at less cost relative to acquisitions. Alliances also are a safe way to test a relationship with a complementary player – a rival, a supplier, an adjacent business – and may lead to well-informed mergers in the future.
8. Evaluate the legality of the merger. Some mergers cross the lines drawn by federal and state antitrust laws. It may be a suitable time to consider legal alternatives if you suspect merging parties will unfairly harm your business specifically, but generally harm competition, innovation, consumers, and workers. This is best done by consulting attorneys with deep experience in federal and state antitrust and unfair competition laws. Certainly, if you see the government acting, that can inform your decision on whether to pursue private litigation.

Challenging Mergers by Litigation as Business Strategy

Charles A. Holt, Professor of Economics at the University of Virginia, and David T. Scheffman, former Director of the Bureau of Economics at the FTC, co-wrote a paper in 1988 titled "Strategic Business Behavior and Antitrust." While some conduct is clearly illegal, they wrote, there is plenty of gray space where activities require careful analysis.

"The types of conduct of concern to antitrust that are more appropriately classified as strategic are generally actions that work to create, enhance or protect market power, often by disadvantaging rivals," Holt and Scheffman comment. "Predatory and limit pricing are examples that have received considerable attention. Another type of conduct that has historically been of concern in antitrust is 'exclusionary' activity, one example being when a firm acquires control over an asset that is 'essential' to its competitors' viability." (For thoughts on modern price-collusion tactics, read Jonathan Rubin's "Algorithmic Price-Setting by Multiple Competitors is a U.S. Antitrust Enforcement Priority.")

In his 2004 book, "Make the Rules or Your Rivals Will," business professor G. Richard Shell, offered stories of several famous (or infamous) business titans who had to, as the title says, make their own rules. These titans were not always titans and learned the hard way how to strategically use shrewd contract drafting, persistent legislative and regulatory lobbying, and aggressive strategic litigation to get to the top. (Sometimes, of course, in the eyes of the government, a company can get carried away. Bill Gates was one of the titans Shell mentioned. Microsoft famously drew the government's attention – launching a landmark antitrust case against the company – and that attention continues to today.)

"Law is perhaps the most hidden of all competitive strategic tools," Shell wrote. "Many in business fear getting tangled up with lawyers, lobbyists, and bureaucrats so they keep their distance from legal matters, but it is just this aversion that makes legal knowledge such a rich source of competitive advantage for those who take the time to understand how legal systems really work."

With the words of these scholars and authors in mind, we urge companies and their attorneys to consider legal action in responding to anticompetitive mergers – in addition to sound business practices – to maintain a competitive edge.

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